Tax Compliance Costs Exceed One Trillion Dollars

Posted October 25th, 2010

Why is this Topic Important to Wealth Managers? Provides an overview of the cost of compliance in regards to the federal income tax.  Discusses industry positions in relation to complexity and efficiencies.  Presents data and draws astonishing conclusions about total cost of tax compliance.  Read on to find out more.

“The federal tax system imposes a wide range of recordkeeping, computational, and filing requirements upon businesses and individuals.”  As many of us in the industry already know, “[c]omplying with these requirements costs taxpayers’ time and money.” [1] At the other end of the spectrum, the complexity of the tax code presents opportunity for those who understand it, and can explain it, to those who cannot.  “The Tax Code becomes more complex every year – especially this year with so many new tax credits and other rules as the federal government attempts to provide some taxpayers with relief during the economic downturn,” states National Society of Accountants president Robert L. Cross.  [2]

Has it always been this complex?  The short answer is no.  In 1913 the first year of enforcement of the present income tax code as we know it today, the actual law and regulations was comprised in total in a 400 page textbook.  It has been found that “the tax code really didn’t explode in complexity until World War II.” [3] In 1939 the tax code was a mere 504 pages, but by the end of the war it was up to 8,200 pages in 1945.  Since that time, “the number of pages in the U.S. federal tax code has grown at a near-steady exponential rate of 3.28% per year.” [4] Estimates project then that the total volume of the code, regulations and other administrative material this year is approximately 71,684 pages in length. [5]

Even government officials note the “tax code has grown so long that it’s challenging even to figure out its length.” [6] A study of the tax code conducted in 2008 by the National Taxpayer Advocate report “pegged the code at around 3.7 million words.” [7]

Like a sophisticated syntax that has developed over time, when the “tax laws become more complex, so necessarily does the language needed to describe them to the public.” The Tax Foundation gives an example, stating, there are at least 5 different definitions of who qualifies as [a] child for tax purposes, and all these definitions are required by the laws that Congress has passed over the years.” [8] As author reasonably concludes, “Congress cannot craft a 3.7 million word document and expect the results to be ‘clear and concise.’ ” [9]

So what effect does the enforcement of the taxes have on the taxpayers (not including taxes themselves)?

The average cost for the preparation of an itemized Form 1040 and state return is $229 nationally. [10] An “s-corp” is in the neighborhood of $665 whereas filing an Estates Form 706 could cost up to an average of $2,044. [11]

“There are between 900,000 and 1.2 million paid preparers nationwide” [12] Interestingly enough, only 25% of tax professionals are Certified Public Accountants. [13] However, the IRS plans to “create a public database of registered preparers for consumers.”  [14]

The most recent estimates available purport to contend that individuals, businesses and nonprofits “spend an estimated 6 billion hours complying with the federal income tax code.” [15]

The Government Accountability Office (GAO) estimates the total individual and corporate compliance cost (using the lowest available estimates) “yields a total roughly 1 percent of GDP per year.” [16]

The GAO also notes, the tax system “results in economic efficiency costs.”  “These costs occur when tax rules cause individuals to change their work, savings, consumption, and investment behavior in ways that ultimately leave them with a combination of consumption and leisure (now and in the future) that they value less than the combination they would have obtained under a tax system that did not alter their behavior.” [17]

The two most comprehensive studies used by the GAO in regards to efficiency “show costs on the order of magnitude of 2 to 5 percent of GDP each year (as of the mid- 1990s).” [18]

As of the most recent estimates (2008), the United States Gross Domestic Product was $14.591 trillion. [19] This data means that the “compliance” related costs are currently estimated at $145 billion.  The “efficiency” costs are approximately $291 Billion to $729 billion annually.  The high estimates then yield a total of tax cost to society (not including actual taxes paid) of approximately $1.165 trillion dollars 2010, relatively using 2008 GDP data.

Tomorrow’s blogticle will continue to discuss taxation.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.


[1] “Report to Congressional Requesters- Summary of Estimates of the Costs of the Federal Tax System”. At 3. United States Government Accountability Office.  GAO-05-878. August 2005.  http://www.gao.gov/new.items/d05878.pdf.  Last Accessed 10/17/2010.

[2] “Survey Finds Tax Prep Fees Average $229.” WebCPA. December 16, 2009.

http://www.webcpa.com/news/-52744-1.html.  Last Accessed 10/17/2010.

[3] “The Growing Complexity of the U.S. Federal Tax Code.”  Politicalcalculations.com.  March 11, 2010. http://politicalcalculations.blogspot.com/2010/03/growing-complexity-of-us-federal-tax.html.  Last Accessed 10/17/2010.  Citing CCH Standard Federal Tax Reporter.

[4] “The Growing Complexity of the U.S. Federal Tax Code”.

[5] Id.

[6] Mark Robyn.  “Who is Really to Blame for Bewildering Tax Rules?”  Tax Foundation.  Tax Policy Blog.  March 12, 2010.  http://www.taxfoundation.org/blog/show/25987.html.  Last Accessed 10/17/2010.  Citing, Nina Olson, the National Taxpayer Advocate at the IRS.

[7] Mark Robyn.  “Who is Really to Blame for Bewildering Tax Rules?”.

[8] Id.

[9] Id.

[10] “Survey Finds Tax Prep Fees Average $229.” WebCPA. December 16, 2009.

http://www.webcpa.com/news/-52744-1.html.  Last Accessed 10/17/2010.

[11] “Survey Finds Tax Prep Fees Average $229.” WebCPA.

[12] Ryan J. Donmoyer.  “H&R Block, Jackson Hewitt Must Register With U.S. IRS (Update3)”.  Bloomberg.  January 4, 2010.  http://www.bloomberg.com/apps/news?pid=newsarchive&sid=amNva7FXtukM.  Last Accessed 10/17/2010. Citing the Internal Revenue Service.

[13] “Survey Finds Tax Prep Fees Average $229.” WebCPA.

[14] Ryan J. Donmoyer.  “H&R Block, Jackson Hewitt Must Register With U.S. IRS (Update3)”.

[15] Mark Robyn.  “Who is Really to Blame for Bewildering Tax Rules?”

[16] “Report to Congressional Requesters- Summary of Estimates of the Costs of the Federal Tax System”.  United States Government Accountability Office.  GAO-05-878. At 3. August 2005.  http://www.gao.gov/new.items/d05878.pdf.  Last Accessed 10/17/2010.

[17] “Report to Congressional Requesters- Summary of Estimates of the Costs of the Federal Tax System”.  United States Government Accountability Office.  At 3.

[18] Id at 4.

[19] Gross Domestic Product.  U.S. Dollars.  Source World Bank, World Development Indicators. Last updated October 1, 2010. http://www.google.com/publicdata?ds=wb-wdi&met=ny_gdp_mktp_cd&idim=country:USA&dl=en&hl=en&q=us+gdp.  Last Accessed 10/17/2010.

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2 Responses to “Tax Compliance Costs Exceed One Trillion Dollars”

  1. Almost everybody in the country agrees that we need to reform our tax system. The current tax code consists of 71,000+pages and nobody understands it in its entirety. Many ideas have been presented to reform the tax code. I believe that a progressive sales tax is worth looking into to replace our current income tax syste.

  2. [...] This post was mentioned on Twitter by beachroses, Joshua Price. Joshua Price said: RT @beachroses: Tax compliance costs exceed one trillion dollars, code is 71,684 pgs in length http://bit.ly/f5ItPe #fairtax [...]

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